In Depth: China Puts Industry, Consumers at Heart of Next Five-Year Plan
By Yu Hairong and Ding Feng
China’s economic game plan for the rest of the decade seeks to shift the focus of policymaking toward the real economy by modernizing industry, jump-starting sluggish household spending and easing the risks bubbling up from the country’s mountain of local government debt.
The country’s leadership approved the blueprint for the 15th Five-Year Plan, which covers the years 2026 to 2030, at the Fourth Plenum of the Communist Party’s 20th Central Committee in late October. The blueprint lays the groundwork for China to achieve an overarching goal of becoming a “medium-developed country” — defined as doubling 2020 per capita GDP — by 2035. For that to happen, China’s economy needs to grow by at least 4.17% a year on average over the next decade, according to an official explanation.
A host of challenges stand in the way of China reaching its goals. They include unbalanced and inadequate development, insufficient effective demand and the difficulty of switching to new drivers of economic growth.
To take on those challenges, the blueprint outlines a multipronged strategy that emphasizes both the quality and quantity of growth. China’s priorities are laid out across 12 strategic tasks for key areas such as industrial development, scientific and technological innovation and the domestic market. The major policy direction is a continuation, strengthening and optimization of the 14th Five-Year Plan, said Robin Xing, chief China economist at investment bank Morgan Stanley.
However, there are some critical shifts in emphasis for the new five-year plan. The blueprint focuses on building a modern industrial system and accelerating the growth of household consumption. For the first time, it calls for “enhancing fiscal sustainability” against the backdrop of Beijing’s efforts to tackle local government debt risks.
Modernizing industry
The blueprint puts the construction of a modern industrial system in a more prominent position than previous five-year plans. The blueprint is explicit that China should “maintain a reasonable proportion” of its manufacturing sector, and build a modern industrial system with advanced manufacturing as its backbone. The call reflects Beijing’s concerns about the hollowing out of industry that has occurred in some major economies.
This industrial strategy is two-pronged. First, China needs to upgrade traditional sectors like mining, chemicals, textiles and shipbuilding so their position in the global supply chain is secure. This could create an estimated 10 trillion yuan ($1.4 trillion) in new market demand over the next five years, Zheng Shanjie, head of the National Development and Reform Commission, said at a press conference on Oct. 24.
The second goal is to cultivate emerging industries and forward-looking future industries. The plan calls for developing clusters in new energy, new materials, aerospace and the low-altitude economy, a term that refers to a range of potential businesses that could take advantage of low-altitude airspace, such as drone package delivery.
The blueprint also tasks the country with pursuing breakthroughs in the industries of the future, such as quantum technology, hydrogen energy, nuclear fusion, brain-computer interfaces, AI-empowered robots and 6G wireless communications.
Underpinning this industrial vision is an urgent push for technological self-reliance. The blueprint calls for “unconventional measures” to make decisive breakthroughs in key technologies, including integrated circuits, basic software and advanced materials. Strengthening original innovation will help China establish a first-mover advantage, said Guo Lei, chief economist at GF Securities Co. Ltd.
Unlocking domestic demand
China’s policymakers have for years listed insufficient effective demand as one of the major problems holding back economic growth. The blueprint for the next five-year plan makes tackling the issue a central priority. The explicit goal is to significantly increase the ratio of household consumption to GDP.
To achieve this, policymakers are targeting both supply and demand. On the demand side, the blueprint called for measures to create jobs and increase incomes. It also pledged to implement a system for staggered paid vacation time and to remove unreasonable restrictions on the purchase of big-ticket items like automobiles and homes.
On the supply side, the plan aims to expand the provision of high-quality goods and services by easing market access. Analysts from China International Capital Corp. Ltd. suggest this could result in optimized regulations that could unleash supply.
Government spending is set to play a larger role, with a commitment to increase the share of public service spending in total fiscal expenditure. This includes gradually increasing the basic pensions of both urban and rural residents, expanding the scope of free education, and exploring the idea of extending compulsory education beyond grade nine.
Investment remains a tool for expanding domestic demand, but the focus is shifting. The blueprint stressed improving the structure of government investment to favor projects that improve livelihoods.
Calling for fiscal discipline
In a notable first, the blueprint explicitly calls for “enhancing fiscal sustainability” against the backdrop of the country’s efforts to tackle local government debt risks.
While fiscal policy needs to remain proactive to support growth, government revenue isn’t growing as fast due to a slowdown in traditional sources of tax revenue. At the same time, the demand for spending on social welfare, investment and employment continues to grow. To square this circle, the blueprint proposes a raft of reforms. These include unifying budget allocation authority and establishing a long-term mechanism for managing government debt.
The blueprint also calls for maintaining a “reasonable macro tax burden.” Analysts explained that this doesn’t mean across-the-board tax cuts, but rather an optimization of the tax system. This could involve eliminating regional and industry-specific tax incentives that are no longer effective and exploring new sources of tax revenue, such as a carbon tax or a digital asset tax.
Another idea raised in the blueprint was activating idle assets. This involves identifying underutilized state assets — including land, real estate and infrastructure — and coming up with a way to put them to better use. China has accumulated a host of assets including infrastructure, industrial equipment and data resources, said Luo Zhiheng, chief economist at Yuekai Securities Co. Ltd. Tools like real estate investment trusts could be employed to improve returns on these assets.
Fortifying the financial system
As part of its goal to “accelerate the building of a strong financial nation,” the plan outlines significant reforms to strengthen the financial system’s stability and its support for the real economy, meaning the part that produces actual goods and services.
A new proposal that has drawn close attention is the creation of a “comprehensive macroprudential management system.” Speaking at the Financial Street Forum just days after the plenum, People’s Bank of China Governor Pan Gongsheng said the central bank is considering splitting its macroprudential assessment framework into two parts: one focused on monetary policy implementation and the other on macroprudential and financial stability assessment.
Pan also revealed the central bank is exploring an arrangement to provide liquidity to nonbank financial institutions under specific scenarios. This is a significant development, as a liquidity crisis at a major nonbank institution could undermine the financial system.
Meanwhile, the new five-year plan re-emphasizes the five focuses of finance — directing financial resources toward technology, green development, inclusive finance, pension finance and digital finance. It also calls for improving the “inclusiveness and adaptability” of capital markets, boosting direct financing through stocks and bonds, and steadily developing derivatives and asset-backed securities.
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
Image – stock.adobe.com